Just what causes the ups and downs in natural

							                             PRICE VOLATILITY IN THE NATURAL GAS MARKET
                              – “WHAT ARE THE FACTORS?”

                                                                          February 28, 2003




Just what causes the ups and downs in natural gas prices? What are
the factors anyway? Sometimes it’s just one thing and at other times
it’s a mix. CGA provides this briefing to help you understand some of
the reasons for natural gas pricing.

Ottawa (February 28, 2003) – The commodity price of natural gas is determined in the
marketplace and is not regulated. There is a single North American market for natural
gas. The key factors that affect the price of natural gas include supply, demand and
storage levels in North American gas markets. Typically, prices increase during the
winter months when demand is greater and decrease during the summer months when
demand is lower. Natural gas prices are also influenced by oil prices to the extent that
there is competition between oil and gas, particularly in industrial markets and electric
utility markets (fuel to produce electricity).

While commodity prices are not regulated, the price negotiated between a local
distribution company (LDC) and its suppliers must be authorized at the provincial level.
Not only that but LDCs are not allowed to make any profit on the sale of the gas itself.


What’s going on today?
The graph below illustrates how the recent volatility in natural gas prices and the price
spike of 2000 translate to a monthly average commodity price. While there certainly is
daily volatility in the market place – as we’ve seen in the last week of February – on
average the price is for all intents and purposes seasonally cyclical.
The colder than normal winter we have been experiencing in Canada and the U.S. has
caused greater than normal natural gas usage. For instance so far this winter in central
Canada, it’s been 14% colder than a normal winter. Compare this to last winter where it
was in fact 16% warmer than normal, and it’s understandable why demand for natural
gas is high. While long-term supplies of natural gas are abundant, supplies from
conventional basins are declining. Natural gas delivery and storage systems have been
running at full capacity to keep up with the increased demand this winter. This has
resulted in very low natural gas storage levels in Canada as LDCs successfully manage
the huge draw on their pipeline and storage systems. A decrease in drilling activity in
2002 has somewhat compounded the problem. Therefore, since pressure on demand
has been greater than supply during this heating season, there’s been a corresponding
upward pressure on the price of the commodity.

The American Gas Association (AGA) gave testimony at a Senate Energy Committee
hearing on “Natural Gas Supply and Prices” this week (February 25) wherein they stated
that the relationship between natural gas supply and prices is at a critical crossroads.
Their contention is that in North America, we need to ensure strong supplies of natural
gas in order to dampen some of the volatility of wholesale gas markets.

CGA agrees with the AGA assessment and expands on this by pointing out that natural
gas prices are tied to market forces like all commodities but that the North American
market is so diversified that no-one stakeholder can dictate the price. Consumers and
suppliers respond to market signals and when those signals indicate overwhelmingly
that supplies are tight – for whatever reasons – then price spikes occur.

Witness the signals sent by recent world events relating to the Middle East, Venezuela
plus the recent oil transfer station explosion on the U.S. east coast that have caused
increases in the price of oil. While oil pricing is a function of world markets and natural
gas is more or less a function of the North American market, there’s certainly a link
between the two commodities as heating fuels and the corresponding differential price.
Therefore, as oil prices increase, there is some upward economic or financial pressure
on the price of natural gas.

These circumstances have all combined to signal a squeeze on supplies and when that
happens, fundamentals of supply and demand economics kick in and the price goes up.


Going Forward
Fortunately, we are nearing the end of the heating season, and it’s expected that
consumer demand will ease up correspondingly. However, what effect this will have on
the commodity price of natural gas is difficult to predict, as there will still be pressure on
natural gas delivery systems to refill depleted storage during the off-heating season.
That’s why it’s so important for government to create the right regulatory climate allowing
natural gas transmission and distribution companies to expand their infrastructure in a
fair and equitable manner. This will go a long way to ensure that strong supplies of
natural gas will indeed dampen the volatility we are seeing today.

It’s also important to know that CGA member companies successfully operate their
transmission and distribution systems to manage the impacts of high demand on supply.
They also actively participate in and promote programs that help customers manage
their energy bills such as energy efficiency and customer education programs.

Finally, it’s important to know that clean, reliable and environmentally friendly natural gas
– known as a hydrogen carrier – continues to be your most economical energy choice.
Natural gas is the best alternative fuel source for reducing greenhouse gas emissions
and is the bridge to renewables and sustainability.

For more information or to find out how your local natural gas distribution company is
working to serve you better, please contact info@cga.ca.